Aerospace and Defense Stocks are in the Spotlight After Balloon Incidents

The flurry of unidentified objects that have been shot down over North America in recent weeks may yet again boost stocks in the aerospace and defense industry, but investors who are considering using ETFs should be aware of there are some key differences between the two largest funds.

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After a suspected spy balloon from China flew across a large part of the country during the first days of February, the U.S. government took a more aggressive stance, shooting down a fourth unidentified object on Sunday, as the administration takes a more aggressive stance against the Chinese government.

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There is a rising level of tensions between the United States and China as a result of these events, and this has led to some investors easing their fears that the looming debt ceiling fight in Washington will negatively impact the outlook for defense contractors working hand-in-hand with the military in the future.

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“As a result of these incidents, we believe there is a good chance that defense spending will not be cut, but perhaps even increased,” Roman Schweizer, an analyst at Cowen, said in a note to clients on Sunday.

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The investment outlook for the defense sector, which was upgraded to positive by Credit Suisse's Scott Deuschle on Feb. 6, was reiterated by the analyst in a note to clients on Monday.

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“Congressional support for the DoD budget may be reduced as a result of these events, as Congress will be less likely to use it for political purposes. We emphasize specifically that geopolitical tension/anxiety has historically been a driving force behind past trends in defense budgets, and we would expect that this will be no different this time around," Deuschle said in a statement.

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Despite the fact that defense stocks have outperformed the broader market over the past year, largely due to the war in Ukraine, the latest shootdown doesn't appear to have had much of an effect on the sector. Last week, the three largest ETFs in the industry had an average price return of less than 1%, despite the fact that the broader averages declined over the week.